Thursday 18 June 2015

Canaccord and Tungsten Part III

Canaccord have admitted their school boy error.

In our note dated 16 June 2015, our per share valuation double counted the 16.9m Conditional Placing Shares, resulting in an erroneous share count of 142.3m. We correct our share count to 125.4m.

You would expect them to increase the target price to 109p based on the correct share count but they manage to pull out another trick similar to the ridiculous cost of funds

At same time, we now use our FY16, rather than FY15, net cash estimate of £9.2m in our valuation, in line with our 12 month target price (we previously used FY15 net cash of £12.8m plus £16.5 of net fund from the equity placing).

What has enlightened them two days after publishing the initial report? I suppose they must have taken few weeks to prepare the initial report.  It seems like a desperate measure to keep the target price under 100p.

So they have updated the target price to 99p from 96p.

I don't expect any foul play from Canaccord as one of the Tungsten's Non- Executive Director (Mr Peter Kiernan) is also the Chairman of European Investment Banking at Canaccord Genuity.

But as per companies house documents, Mr Peter Kiernan has resigned or removed from Directorship of Canaccord Genuity Limited on 2nd April 2015. Is this a coincidence?

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Tuesday 16 June 2015

Canaccord and Tungsten Part II

One more on Tungsten...

So the value analyst was right. His comment on 14th May did hint something- a major reduction in broker expectations, slipped out without informing the market properly”.  My comment was not on the target price but on the overall expectations. Canaccord's update today does show that they have downgraded their expectations aggressively. 
- Target price reduced from 369p to 96p
- Net Interest Margin reduced from 5.5% to 1.5%

The concern is how that information got leaked before the actual note was published.  Two questions come to my mind
- Which of the short fund holders are Canaccord clients?
- What information was shared/leaked by Canaccord analyst to those clients?
I hope Canaccord's Compliance will look into this.

Two glaring points from Canaccord's update-

"Our 96p target is based on £104m for Tungsten Network (acquisition price), £31m for
Tungsten Early Payment (DCF at 20% discount rate), -£53m for central costs (10x 16E),
£12.8m net cash, £16.5m from equity funding and £25m net assets in Tungsten Bank"

If you add all of the above  and divide by 125,405,397 shares - value comes at 108.68p. It reminds me of Dark Destroyer's unmatched mathematical skills. It seems like 96p was released to oblige somebody.

Second one about funding cost increased to 3.1% for large suppliers and 7.2% for SME suppliers to bring the net interest margin down.  Tungsten management should clarify on this. It's hard to believe that cost of funding from Insight is that expensive. If that's the case, they should retain the bank and issue bond or reinstate deposits to get cheaper funding .


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Monday 8 June 2015

Canaccord and Tungsten Part I

The Tungsten Saga continues....... this time what has gotten me started is another gem from a so called “value” analyst Paul Scott on 14th May after Tungsten declared it's trading update. So here goes....

As usual, he started by blaming the house broker as follows “a major reduction in broker expectations, slipped out without informing the market properly”. This seems to be an absolute lie (and if not, then Canaccord has to come clean on this). Canaccord Genuity is the only broker who covers this stock and has reduced target price only once – on the14th Jan 2015 from 405 to 369. Canaccord even came out to defend Tungsten on 25th Feb 2015 after the first bear attack.  Few noteworthy points below -

On Cash Balance
Canaccord on 25th Feb 2015
We expect Tungsten's free cash to support cash burn to at least October 2015. Tungsten had £27.7m of free cash as at the end of October 2014. Based on FCF burn of £16.5m in H1 FY15, we estimate cash burn of £2.8m per month until the end of the fiscal year and a year ending free cash balance of £11.2m.
Tungsten on 14th May 2015
Tungsten's cash position at 30 April 2015 was £31.4 million, including £18.6 million of cash or cash equivalents held in Tungsten Bank

On Financing
Canaccord on 25th Feb 2015
We do not forecast that 10% of Tungsten's e-invoicing volume will be financed. We forecast adoption rates rise from 0.3% at the end of FY15 to 2.2% at the end of FY16 and 2.7% at the end of FY17. We make no changes to our forecasts that were revised in January. We forecast average annualised financing volume rises from £7m in FY15 to £257m in FY16 to £566m in FY17.
Tungsten on 14th May 2015
By 30 April 2015, 188 suppliers had signed a contract to use Tungsten Early Payment, and 38 suppliers had completed the registration process to become a customer of Tungsten Early Payment. Total invoices financed was £32 million.  

*average annualised financing as per Tungsten is £10.6m

On Net Interest Margin
Canaccord on 25th Feb 2015
We forecast a 5.5% net interest margin
Tungsten on 14th May 2015
Tungsten's experience has shown the two distinct markets, large corporates and SMEs, have different average yields, with large corporate invoice financing having an average yield of 4.5% p.a. and SMEs having an average yield of 12.4% p.a.   ”

So Canaccord was spot on with the numbers about two months before the update.

Mr NoValueAdded analyst goes on to say - “a total of £32m invoices having been financed so far is chicken feed. They're only financed for say 30-60 days remember, so that's next to nothing in income for TUNG” . He perhaps forgot to mention that only 38 suppliers got £32m worth of invoices, out of their total £40.5m invoices, financed in 4.5 months. In my humble opinion, this indicates some demand of the product from enrolled suppliers. 
 

This quote from him probably deserves a special mention of its own - “recently I stumbled by accident upon another UK listed company which is doing very much the same thing as Tungsten, although possibly on a smaller scale, and is already profitable, called Proactis Holdings (LON:PHD) (disclosure: I hold shares in Proactis)”. Deja vu? This comment seems to be on the same lines as that of Dark Destroyer who compared OB10 network with a small software company. The key point used by shorters for the last 3-4 months is to discredit OB10 network and to show it as worthless. There are few companies who provide compliant e-invoicing services at global level and one of those is listed independently- Basware (Market Cap -£400m).

Tungsten released an RNS on 21st May about the possible JV which got lost in the placing saga and surprisingly this JV news is ignored by biased unregulated bloggers. 

The Company is currently in discussions with respect to a proposed joint venture ("JV") arrangement with a global financial institution, which would be complementary to its current funding arrangements and which could, if concluded, involve both Tungsten Early Payment and some of the global financial institution's customers being channelled through the JV.  There is no certainty that any such JV arrangement will be consummated and further announcements will be made in due course.

If Tungsten is able to enter this JV, the obvious downside is they will lose half of the financing growth but the upside is to gain some of the invoice financing clients of the global financial institution, which will jump start Tungsten's early payment and will provide revenue to feed the growth engine and bring down the cash burn rate. The key will be outstanding loan book of global financial institution's invoice financing business. If a UK based challenger bank (Aldermore) can build a loan book worth £200m in 3-4 years, then the loan book of prospective JV partner should be substantially bigger

From the global financial institution's perspective, it will gain half the share in the financing growth of Tungsten early payment and will loose half of the revenue from it existing invoice financing clients. The JV's revenue will be more from the clients on Tungsten Early payment than that of the global financial institution's system because of reduced operating cost.

Based on the above, the JV should be in the money from day one and have a lot of potential for growth.

And the last point about Tungsten share price; Ed Truell single-handedly supported the share price with his buys after the first bear raid on 24th Feb and price recovered back above 200. I believe Ed Truell got restricted from the first week of April because of the JV deal and from there onwards the share price has been ground down on daily basis. There was no support from other long only funds which is the key deferential from the US Market. Gotham City tried a similar trick on another Tech company (EIGI) in US and that didn't work. It seems like UK is not the right place for Tech growth companies.

We shouldn't be far off from an update on the JV as the time frame for these types of deal is around 2-3 months. It will be interesting to see the impact of the JV on the share price. And of course the impact from an unrestricted Ed!!!

I'm not writing to support Tungsten's growth prospect. My aim is to bring out the lies spread by unregulated bloggers.

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All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this b

Monday 13 April 2015

Dark Destroyer- destroyer of common sense Part II

Thanks a lot for all the messages. Perhaps know my last post was a little bit unprofessional but I'm not going to apologize. I strongly believe that unregulated bloggers who write without proper homework should be questioned and checked at some level. And I can see the motivation of such bloggers as my last piece was read in more than twenty countries.
On my part, I went through Dark Destroyer's series again to make sure that I wasn't unfair. And once again, I am at a loss for words. Here are a few more points that I believe are worth a mention -

Growth Story

In his third article Dark Destroyer mentioned-“The interim statement to 31 October 2014 indicates that suppliers grew to 171,000 from 168,000 in April 2014. This is 1.7% half on half growth.  However, this differs with the accompanying interim presentation, which highlights 174,000 suppliers (up from 168,000). I can only presume that the discrepancy lies with this figure representing growth in the period 31 October 2014 to the release of the interims. That growth is a bit better, but still less than a 2% increase over several months.

As I mentioned in my last article, Dark Destroyer is not able to work out the supplier captive model. He was biased and ignored the growth in buyer numbers. OB10 took 14 years to add 122 buyers (IPO document- Intention to float -page 2) and the current management added 46 (37.7% growth) in one year since OB10 acquisition. It is a massive achievement in this market with fierce competition from Ariba, Basware, TradeShift, Taulia and numerous other small companies. The master stroke was to acquire DocuSphere. The other key point was to get four German government departments on-board on Ariba's home turf.

Similarly supplier numbers were 140,000 as per IPO document (Intention to float -page 2) and 31,000 (22.14% growth) were added in one year since OB10 acquisition.

The increase in buyers had definitely increased their addressable market and will reflect in supplier numbers in a very short while.

Cash burn
In his first article on 23rd Feb 2015, Dark Destroyer mentioned - “Its net cash position declined from £62.6 million as at 30 April 2014, to £27.7 million as at 31 October 2014. Whilst it is investing heavily, it is also burning through considerable operating related cash. Consensus forecasts project that net cash will have declined to £4.3 million by 30 April 2015.
PwC has to sign off its books during the next four months or so, and therefore be certain that it has sufficient resources to meet its obligations. My reckoning is that a sizeable cash call is needed to persuade them to do the signing.

Tungsten declared preliminary results for the year to 30th April 2014 on 8th July 2014. Dark Destroyer missed the post balance sheet event (page 35 and also explained on page 12 of annual report 2014) which clearly conveyed £25.3m was paid in June 2014 for FIBI bank acquisition. So anybody who can read and read carefully, would have known that cash available at start of that period was not £62.6 million but £37.3m.

Let's look at the cash burn in first year (Oct 2013 – Oct 2014 ) of Listing-


If Tungsten had a similar cash burn (26.2m) in the second year, they would still have enough cash till Oct 2015. I cannot understand how Dark Destroyer arrived to this - “Consensus forecasts project that net cash will have declined to £4.3 million by 30 April 2015”

The other important point to consider is one-off costs in first year of listing. Understandably, a considerable cost would be incurred to-
- integrate OB10 and FIBI bank systems to launch early payment.
- integrate OB10 and cloudbuy software for Analytics
- get FIBI bank licence transfer

Tungsten's cash balance is more than enough to cover whole of 2015 even without
  • no revenue* increase from e-invoicing (37.7 % more buyers in second year)
  • no revenue from invoice financing ( went live in UK and US in Dec 2014)
  • no revenue from Analytics (one contract signed and 27 in trial as per Jan 2015 interim statement)
  • no revenue from DocuSphere

*Revenue from e-invoicing in first year was £21m

In my opinion, while Tungsten doesn't need to raise cash they should do so to strengthen the balance sheet and ward off bears.


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All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this b

Thursday 12 March 2015

Dark Destroyer- destroyer of common sense

Dark destroyer is a monkey who is putting his tail on fire to burn Ed Truell's empire but all he seems to do is simply burn his tail!. The share price has recover from the all time low. He wrote four articles to criticize Tungsten's business model; and did a shoddy job in analysing and presenting facts.

An analyst who can't analyse-
In his fourth article, he compared Ariba's dynamic discounting model with that of Tungsten and calculated Ariba's discounting penetration to be between 0.003% to 0.007%. Ariba's discounting model is dependant on availability of buyer's spare cash and willingness to pay early to supplier's to get discount. Dark destroyer somehow concluded that all of about $700 billion dollars were made available by buyers for early payment. He made a wrong assumption that buyer's have lot of free cash and are willing to pay early. In fact it is quite the opposite in the real world.
If buyers have spare cash and are willing to pay early, the very existence of invoice financing business does not make sense. Dark destroyer contradicts himself in the second part of article by showing that there are lots of companies involved in invoice financing. The sheer number of businesses involved in invoice financing proves that buyers don't have spare cash and are not willing to pay early.
I can almost sympathise with Dark destroyer's ill-informed assumptions but for him to contradict that very assumption in the same article is beyond the realm of my comprehension. If nothing else, I think it displays his rather questionable analytical skills.

Google analyst
Dark destroyer has displayed his skill of being able to google-search and has done wonderful job of copying and pasting images from the web on his blog. Are we expected to believe he understands the information he stumbled upon?
In his second article , he used RBS's invoice finance pricing to calculate Net interest margin (NIM) for Tungsten's model. He couldn't understand the difference between 1% of turnover and 1% of invoice value. He missed the renewal fee and did a poor job of calculating NIM to be around 2.15%.
I can imagine it will be hard to figure out RBS's actual NIM for invoice financing from their annual financial statement as it runs a very large and complex business. In the same article he used Bibby Financial Services (UK's leading invoice finance specialist) to get discounting penetration information. If he had gone one step further than the know-all-google-search and spent £1 on downloading the annual report of Bibby financial services from the companies house, he could have saved himself from the embarrassment of coming up with a shabby NIM calculation. It is quite easy to figure out Bibby's actual funding cost and NIM from their last year's report. Aldermore Bank's last year annual report also provides good insight into net revenue margin, net interest margin , administrative expenses and impairment losses of their invoice financing business in UK.

Cannot understand Technology company
In his first article, he compared Direct Insite with Tungsten and mentioned few sales pitch quotes/numbers from their website. He thought Direct Insite to be similar to Tungsten with the market cap about 21 times less than Tungsten. There was also another article published on Seeking Alpha which mentioned Direct Insite as hidden gem and also shown Tungsten to be way expensive with market cap of 27X sales (which I believe is factually incorrect). This has lead to a thought process that Tungsten has paid too much for OB10. I believe most Hedge funds are shorting based on this idea. Tungsten(or their broker) came out in defence that they have paid 5 times of sales which is better than what SAP paid (9 times of sales) for Ariba.

Direct Insite provides number of enterprise level software solutions to corporate and banks. Their main product is paybox to automate their client's lockbox services. There revenue is around £5m per year and they have only got 6-7 clients (one global bank and few corporates). Every client runs this piece of software independently for their own clients (which are 350,000 in total). So in effect every client is building their own mini OB10 network which will never interact with each other. Direct Insite doesn't control/own the data which runs through their software. It is just providing software services and it's clients will monetise the benefits by using the software. If Direct Insite wishes to follow OB10 then they will need at least 5-6 years for development and numerous rounds of funding to convert their enterprise level software to a Global network.

Aldermore has learnt in short time that it is not easy to scale invoice financing business. They have cut balance sheet and are investing in a stable platform after hit with number of fraud cases. They have to write down 8.9m in last 2 years. In light of this, the value of OB10 is under estimated. It provides more robust risk management for supplier fraud, data security and contract compliance.

Weak with numbers
In his second article, he used RBS's invoice finance pricing to calculate NIM to be 2.15% and two days later he corrected himself by using another website (Fund Invoice ) to update NIM by approximate 6 times to be 12.5%. Using his unmatched mathematical skills, he was able to predict that Tungsten will earn £10M in net fees by using either NIM (2.15% or 12.5%). I suppose he will reveal this calculation for his Doctoral thesis!! Dr Dark Destroyer?!!

No clue about business model
Dark Destroyer has mentioned more than a few times about the hardship Tungsten will face to convince suppliers to ditch their “Trusted banks”. He has not been able to figure out the captive supplier model.

As an SME, I would love to join Tungsten network but the buyer of my services/products is not convinced. Do I have any option?

As an SME, I hate Tungsten network but the buyer of my services/products has mandated to receive e-invoice only through Tungsten Network. Do I have any option?

Tungsten doesn't have to convince suppliers. They just need to convince their 166 buyers to mandate e-invoice through their network globally and help the buyers to connect suppliers to the network as soon as possible.

Suppliers will not need Invoice factoring services from the “Trusted Bank” once it has got 50-60% of his buyers on the Tungsten network. The basic feature of Tungsten Network is to improve DSO, reduce collections and administrative costs.

When Suppliers will submit invoices and check status through Tungsten network, I can't understand why would they do the following to receive invoice discounting from their “Trusted Bank”
  • Let the bank have legal charge on the company
  • Pay annual and renewal fee
  • Email them the invoice and wait for 2-3 days for confirmation
  • Get 80-85% of the invoice amount
  • Total credit facility will have a limit

I can go on forever; it is quite amazing that the above piece of analysis got mentioned in The Times articles and that Tom Winnifrith (self proclaimed sheriff of AIM) calls him the most respected analyst. Tom has done a good job on QPP but he has lost it by comparing every AIM CEO with Rob Terry.

Don't get me wrong - this is not about Tungsten's growth prospect. I'm not writing this to support or criticise Tungsten's growth model.;I'm just amazed/surprised/shocked at this piece of analysis.



Disclaimer

All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.n the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this b